Is it time to exit the cow, calf industry?

Peter Callan, Virginia Tech University

Thu, 2012-08-16 10:25

Many cattle producers are contemplating their future in the industry. Should they hang on and purchase feed or exit the industry? What will feeder cattle prices be in 2013? Who makes this decision? The owner? The bank? Will health issues force the dispersal of the herd?

In March 2012, the prices of feeder cattle reached record highs. By mid-July 2012, the severe drought in the Midwest and the Plains caused soybean and corn prices to reach record high prices.

Feeder cattle prices have declined due to the record grain prices and forced liquidation of herds due to drought.

Many producers are contemplating their future in the industry. Should they hang on and purchase feed or exit the industry? What will feeder cattle prices be in 2013? Who makes this decision? The owner? The bank? Will health issues force the dispersal of the herd?

?Sometimes producers are forced to sell their herds ASAP when they are faced with life threatening health issues. Does the owner want to stay in business and perhaps lose all his hard earned equity?

In my opinion, I feel that psychology plays a prominent role in the decision making process to exit the industry. For many producers, the operation of a cow/calf herd is both a life style and a business.

Many producers have the attitude that “The beef industry has always had times of high and low prices. We have had low prices before and stayed in business. We just have to “dig in” and keep going. Eventually prices will increase. They always have before. When we decide to sellout there are always farmers who want to expand and buy more land and cattle. We will be okay. There is nothing to worry about.”

The owner’s pride interferes with making sound economic decisions. In addition, fear of the unknown plays a major part in deciding to stay on the farm and continue raising cattle.

Where will we live? Who is going to hire a middle-aged man who has always raised cattle and farmed for a living?

Human nature is involved

Human nature says that people like security and do not want to leave their comfort zone. Thus producers decide to hang on and the losses in equity mount as feeder cattle prices decline.

All businesses will be sold to either a family member or an outside party. We do not live forever.

Many producers have made minimal contributions to social security. Consequently, they will receive minimum payments of social security benefits in thei rretirement years.

The proceeds from the sale of cattle, equipment and land fund retirements. What happens when a producer sells assets and after debts are repaid and taxes are paid, the producer has few if any funds to show for a life’s work?

What will the producer live on during the retirement years? Do producers want to live in poverty in their retirement years? What is your farm’s exit strategy?

On many farms, the younger generation is not interested in taking over. On these final generation farms, the big question is timing the sale of the beef herd and the farm.

A well known auctioneer stated that the best time to sell out is when prices are high. To most people, this statement is common sense. With the average age of American farmers around 58 years old, many farmers contemplate retiring and selling

their farms in five to 10 years. What levels will feeder cattle prices be at when they decide to exit the industry?

Does the beef producer gamble that beef prices will be on the upward trend in the beef cycle when he makes the decision to sell his beef herd?

Fundamental economic principles dictate that at some time in the future, replacement heifer numbers will increase which will expand the national beef cow herd. This will increase the number of fat cattle being slaughtered and increase beef supplies. Consequently, the larger supplies of beef available in the marketplace will lower prices of feeder and fat cattle and profit margins. Beef prices are cyclical.

Although feeder cattle prices have declined due to the drought, current prices are relatively high compared to historical prices. Prior to the increase in feeder calf prices in April 2010, the 10 year average price for Virginia producers was approximately $1 per pound for feeder steers.

For farmers who plan to sell their farms in the next five to 10 years, this may be an excellent time to disperse their herds since current prices are well above the 10 year average. The bottom line is as follows: does the producer want to remain in control of his business and decide to sell the farm on his time frame (maintaining equity for retirement) or will he let others (e.g. bank, doctors) make these decisions for him?

On the other hand, producers who elect to stay in business for the long-run need to position their businesses to remain competitive for the inevitable decline in feeder cattle prices.

In the coming years, the cow/calf producers who survive and remain competitive (maintain and increase equity) are the ones who have the lowest production costs in a volatile world market place.

Year-round grazing

Maximizing profit per unit of production (cwt.) can be achieved by year-round grazing. Many producers incorporate stockpiling forages into their grazing systems as a way to eliminate the need to bale hay to feed their animals during the winter months. By having the cattle harvest their forage year-round, producers are able to use less machinery and reduce their overhead costs.

Sometimes producers may need to reduce stocking rates in order to have enough acreage for the animals to graze year-round. This is an excellent time to cull marginal animals from herds and cash in on above average fat cattle prices.

In previous years, producers have occasionally liquidated their entire herds during periods of high prices. Then, these producers took their profits and restocked their herds in the future when cattle prices were significantly lower.

By pursuing the policy of selling herds at high prices and restocking at low prices, some of these producers have generated significant increases in their saving accounts! In addition they were able to take vacations and not worry about who was caring for their herds!

The recent record high prices of feeder cattle are presenting cow/calf producers the opportunity of their lifetimes. The old adage “On the plains of hesitation bleach the bones of countless millions” can be used to describe the opportunities that are presented by the recent record high prices of feeder and fat cattle.

For producers contemplating retirement in the next five to 10 years, the sale of their cow/calf herds at current prices will increase the size of their retirements.

For younger producers who have made the decision to remain in the industry for the “long haul” (10-15 years), these near record prices provide them the opportunity to position their businesses to weather the inevitable decline in prices.

Consequently, producers need to make the decision to exit or remain in the cow/calf industry before there are further declines in feeder cattle prices. Otherwise they will squander a prime opportunity that has the potential to significantly increase the size of their bank accounts.